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Ways to Phase Retirement

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The use of phased retirement programs among U.S. companies appears to be waning, even though there may be no better time for HR managers to develop flexible work arrangements geared toward employees age 50 and older.

The Society for Human Resource Management’s 2010 Employee Benefits survey report indicates that only 6 percent of U.S. companies operate formal phased retirement programs, down from 13 percent in 2006. HR professionals without such programs may want to consider developing them before recuperating 401(k) balances help spark a wave of retirements.

The negative impact on organizations of “flash retirement”—the departure of large numbers of retirement-eligible employees in a short period—“could be eased by well-planned phased retirement programs offering a mix of extended employment and other benefits,” notes Warren Cinnick, a Chicago-based director in PricewaterhouseCoopers’ people and change advisory services practice.

Organizations have limited the likelihood of flash retirement, stimulated knowledge transfer and leadership development, and enhanced employee satisfaction through the use of formal and informal phased retirement offerings. Organizational culture and the extent to which it embraces flexible work arrangements are key to operating a phased retirement program, says John Daniel, SPHR, chief HR officer at First Horizon National Corp. In annual workplace surveys at his company, “each year, ‘my supervisor supports a flexible schedule’ rates among the highest-scoring items in terms of satisfaction,” Daniel says.

The bank holding company, known by its main brand First Tennessee Bank, was named by the AARP in 2009 as one of the “Best Employers for Workers Over 50,” in part for the flexible work arrangements it offers older employees.

These phased retirement programs “start with an assessment of the labor market and its talent management needs,” Daniel says. “When it comes to execution, the biggest issue is cultural.”

If an organization does not already have policies, procedures and executive support for flexible schedules, Daniel says the introduction of phased retirement programs creates a “major change management challenge.”

Waiting on Government

Until recently, the primary hurdle related to phased retirement programs was not cultural but regulatory. The passage of the Pension Protection Act (PPA) of 2006 helped clarify some of the legal issues involved in phased retirement, yet confusion remains due to the slow gears of the federal government as well as the evolving nature of phased retirement itself.

“Phased retirement means different things to different people,” says Pierce Noble, a partner at Mercer who testified before the U.S. Department of Labor’s 2008 advisory council on phased retirement.

“There is no universal definition of phased retirement,” according to The Conference Board report Phased Retirement After the Pension Protection Act, an authoritative guide on the practice. Despite the ambiguity, most phased retirement programs share common features, including:

Offering reduced-hours schedules for employees nearing retirement.

Enabling employees who are eligible for retirement to collect pension benefits while continuing to collect their salary in compliance with the act.

Rehiring retired employees as full-time workers, part-time workers or consultants directly or through third parties.

While the law created some new phased retirement options for organizations with defined benefit retirement plans, the future tax implications on companies that compensate retirement-age employees who collect pension benefits remains unclear. The Internal Revenue Service may yet take action related to the PPA’s phased retirement provisions by amending the Internal Revenue Code. Currently, the PPA does not specify any length of time a retired employee must remain away from the organization before the employee can be rehired into a formal phased retirement program that enables the employee to collect pension payments.

These issues may soon be resolved as discussions on the use and structure of phased retirement programs continue to crop up in Washington, D.C., including hearings held by the Senate Finance Committee in mid-July. Until then, experts suggest that companies proceed with common sense when creating formal phased retirement programs.

For example, some retirement consultants suggest that companies include a sunset clause for enrollment when creating formal programs. By closing enrollment after one year, the company can create new guidelines for later phased retirees if the IRS’ forthcoming rules prove too onerous from a tax perspective.

Noble expects the IRS to include nondiscrimination rules in a future amendment. A formal program allowing part-time employment for people “between the ages of 55 and 65,” for instance, likely would qualify as age discrimination. Instead, the program should be open to employees age “55 and older.”

Structural Snapshots

Richmond-based Bon Secours Virginia Health System’s phased retirement program requires employees younger than 65 who retire to wait three months before returning to work for a minimum of 16?hours a week. This “waiting period” reduces any ambiguity related to the “retired” classification. Retired employees who take advantage of this option are eligible for medical, dental and vision coverage as well as tuition reimbursement. In the health care provider’s Richmond health system, roughly 40 percent of employees are age 50 or older.

By soliciting employee feedback, Shelor and her HR team designed phased retirement options that include allowing:

Full-time retirement-age workers to move to part-time schedules of less than 24 hours per week and continue to receive pension checks.

Employees older than 70½ to begin receiving their retirement checks regardless of their employment status.

Employees to retire and then be rehired at a later date while still collecting their retirement checks.

At First Tennessee, workers nearing retirement can enter the company’s “primetime program,” which consists of a flexible schedule of between 20 and 40 hours per week accompanied by full benefits. The program is available to all employees, and Daniel says it currently serves as an informal phased retirement option.

For example, the banking company’s compensation and benefits manager, who reports to Daniel, is 63 and currently works four days a week through the primetime program; in 2011, the manager will further reduce his weekly hours before retiring in September.

“He still has responsibility to help us build programs, respond to regulations and mentor his successor,” Daniel explains. “The mentoring is the key activity … and he is helping us to mentor several other professionals on our HR staff.”

Veteran employees who gear down to phased schedules before leaving the workforce for good have a chance to manage a major transition in a more gradual manner. “Traditional retirement can feel like jumping off a cliff for some people,” notes John Grounard, administrative director for Bon Secours Virginia Health System. “Phased retirement can help the organization as well as the individuals.”

Paul Bursic, director of Cornell University’s benefit services, agrees that phased retirement programs can be mutually beneficial. “We place an emphasis on making sure that the agreement represents a good business model in each individual case,” says Bursic, who helps oversee a formal phased retirement program for faculty members and staff. “Does it make sense for the faculty member or the staff member to step out this way? Does it make sense for the university to have this person doing the types of things he or she can do on a phased basis?”

Cornell University and Bon Secours Virginia Health System also appear on the AARP’s 2009 list of the “Best Employers for Workers Over 50.” At Cornell, faculty and staff members may request to take part in the program. They work “half-effort,” and receive half of their full-time salary and all benefits. The university must agree with the request. Professors who enter the program agree to relinquish tenure. Phased retirees can access pension payouts from their 403(b) plans as soon as they sign their agreements, which generally last two to three years.

The length of the agreement and specific working arrangements that constitute “half-effort” are worked out between individuals and their supervisors or deans. The underlying uniformity of the program is important, Bursic notes, because it helps prevent the perception among faculty and staff that another colleague is receiving special treatment. Yet, the flexibility on defining “half-effort” is important, he adds, to ensure that the situation makes sense on both sides.

Key Steps

In some cases, particularly in small companies, it may make sense to provide “special treatment” to certain employees nearing retirement age. Anna Rappaport, a retirement consultant, actuary and co-author of The Conference Board report, notes that very small companies, particularly those without defined benefit plans, are well-served by informal phased retirement arrangements tailored to individual situations. For example, a small manufacturing company may design a part-time schedule with increased mentoring responsibilities for a soon-to-be-retiring engineer, without creating a formal program.

The format of a phased schedule varies in practice, according to the needs of the company and the desires of the phased retiree. From an employee perspective, working reduced-hours, alternating full-time, project or seasonal schedules may be more or less appealing depending on the employee’s lifestyle. For instance, are they starting a side business? Do they plan to travel? Do they want to spend more time with grandchildren? Do they care for elderly parents? For most employers, an alternating week schedule is probably harder to manage effectively, Cinnick notes, especially with knowledge workers.

HR professionals should address scheduling design after taking other steps, including the following:

Assess cultural readiness. The introduction of a phased retirement program may require a major change management effort in organizations where flexible work arrangements are relatively rare. “Work on the cultural piece first,” Daniel suggests. “That starts with educating managers on the business benefits of the approach. This should be filtered through a business perspective as much as it is filtered through a personal perspective.” Although flexible schedules are prevalent among most health care companies, Bon Secours Virginia Health System’s CEO Peter Bernard still makes an effort to emphasize the value of mature employees and the importance of their scheduling needs. Bernard routinely hosts lunches for workers age 50 and older to listen to their concerns, discuss developments that may interest them and answer questions, Shelor reports.

Review talent management strategy. Rappaport says HR professionals considering offering phased retirement arrangements should begin by understanding what their organizations are trying to achieve from a talent management perspective. The review should also include a survey of existing knowledge transfer efforts; Rappaport points out that phased retirement programs should be integrated with knowledge transfer. “After you address what you’re trying to accomplish at a strategic level, then you can get to the question of how you structurethe arrangement,” she explains. “And then, pay and benefits become important.”

Dig into procedural issues. From a legal and compliance perspective, HR professionals should review the PPA, review relevant age discrimination risks and keep tabs on any amendments the IRS makes to its tax code related to the PPA’s phased retirement provisions. Noble encourages HR professionals to conduct a top-down review of all compensation and benefits programs, HR policies and procedures to ensure that they support part-time employment. For example, some companies currently do not provide health care coverage to employees who work less than 30 hours a week. “If people lose their health benefits when they enter into a flexible arrangement,” Rappaport asserts, “the program is going to be dead on arrival.”

Leave some leeway. Bursic and Daniel suggest that formal phased retirement programs should provide supervisors flexibility to structure the job and schedule to meet the needs of the employee and the organization. “Our role in phased retirement,” Daniel adds, “is to help foster a culture where it can thrive while maintaining flexible policies and support.”

While Cornell University’s formal phased retirement program may look fairly proscribed, upon closer inspection the final agreement relies on a substantial amount of vetting, discussion and collaboration. Cornell’s HR function provides a well-defined policy and support, but it leaves the definition of “half-effort” up to the phased retirees and their supervisors.

Despite numbers suggesting that phased retirement program offerings are on the decline, companies that use such formal and informal programs may well be ahead of the game when the economy stabilizes.

The author is a business writer based in Austin, Texas, who covers human resource and finance issues.

Members may download one copy of our sample forms and templates for your personal use within your organization. Please note that all such forms and policies should be reviewed by your legal counsel for compliance with applicable law, and should be modified to suit your organization’s culture, industry, and practices. Neither members nor non-members may reproduce such samples in any other way (e.g., to republish in a book or use for a commercial purpose) without SHRM’s permission. To request permission for specific items, click on the “reuse permissions” button on the page where you find the item.